I was asked to talk to my colleagues at the Victorian Bar recently in relation to costs recovery in pro bono cases. It is now more certain that costs may be recovered from the other side by litigants who engage their lawyers in a greater variety of pro bono bases. That is as a result of both recent developments in the judge-made law and changes to the Supreme and County Courts’ rules. Over the next few days, I will publish, in digestible chunks, the paper I distributed. What follows is the first part.
The amendments to Order 63 of the Supreme Court’s rules and of Order 63A of the County Court’s rules are designed to overcome one aspect of the operation of the indemnity principle in costs law.
Simply put, costs are awarded as a partial indemnity to a successful party for that party’s liability to pay their own lawyers and witnesses and for such payments already made. The indemnity principle says that the amount allowed under a costs order may not exceed the total of those liabilities. Put most pithily, the loser’s costs liability cannot be greater than the winner’s fees and disbursements.
When lawyers promise to do legal work on the basis that they will be paid only in the event of and to the extent of a costs order, or of a settlement including a specific costs entitlement in favour of the client, or (even more generously) only if and to the extent that, and when, the unsuccessful party pays the successful party under such a costs order or settlement, there is on one view a conceptual problem. The problem is that at the moment of making the costs order, there is as yet no liability on the successful party to pay legal fees and disbursements to its lawyers and so nothing a costs order can partially indemnify.
The new rules say, in essence, that the indemnity principle is not to be applied so as to prevent the making of costs orders in the Supreme and County Courts only because of this conceptual problem, at least where the lawyers have agreed to charge on a ‘pro bono basis’. That is the first thing they do, and this advances the position in the case law only a little.
Secondly, they also allow these Courts to order that the unsuccessful party pay the costs ordered directly to the pro bono lawyer rather than to the successful party. This is potentially a very significant benefit of bringing yourself within the operation of the rules.
Thirdly, the new rules ensure that when a costs order made by the County or Supreme Courts comes before the Costs Court for taxation, the conceptual problem will not be allowed to result in the costs award for work done by lawyers on a pro bono basis being taxed in the sum of nil dollars. This is just the flip side of the first job done by the rules.
The new rules apply where:
‘the legal practitioner provides [legal services in connection with a proceeding in the Supreme Court / County Court] on the basis that:
(a) the legal practitioner is to receive no professional fees from [the client];
(b) the legal practitioner is to receive such professional fees only to the extent that an order for costs covering such professional fees is made in favour of [the client]; or
(c) the legal practitioner is to receive such professional fees only to the extent that payment is made in satisfaction or part satisfaction of such an order for costs.’
The quoted text is essentially the new rules’ definition of ‘pro bono basis’.
The case law (which has developed significantly in recent years) and the new rules are now similar but different. Each is in some respects more extensive than the other. Going forward, practitioners may choose to draft costs agreements for work in the Supreme or County Courts so as to ensure that legal services are provided on a ‘pro bono basis’ and the rules’ operation is attracted.
It is important to understand the case law, however, because it may have application to existing pro bono costs agreements which do not provide for legal services to be provided on the rules’ very particular definition of ‘a pro bono basis’, and because the case law will probably continue to have operation in relation to pro bono cases in other state courts and tribunals, unless they too make similar rule changes.
The case law is almost as good as the rules, and is capable of having operation in relation to a broader range of costs agreements which it might be desirable for all sorts of reasons to make in cases not conducted principally for commercial motivations, even in County Court and Supreme Court cases. It would be a pity, in other words, if everyone slavishly drafted costs agreements to ensure they were within the operation of the rules without making an informed choice to do so.
 It is useful in discussing this topic to maintain a linguistic distinction between ‘fees’ (charged by lawyers, and broken down between professional fees for charges for work done by the lawyer and disbursements, usually incurred by the solicitor, including counsel’s fees) and ‘costs’ which are paid by one litigant to the other.
The Indemnity Principle
It is repeatedly stated that the indemnity principle is a flexible instrument of policy. It is ‘not to be applied rigidly’. Rather, it is to be applied ‘flexibly and reasonably’. The principle has regard to the substance rather than the form of things and strives to produce a sensible and just result; it must be reasonably understood and applied. It is ‘a flexible principle, designed to allow for a just and fair result’.
The indemnity principle is replete with exceptions:
(a) Solicitor litigants are entitled to scale costs for work they do themselves even though they do not actually incur any liability to pay themselves. This is known as the ‘Chorley exception’. See this blogpost. The application of the rule to barristers is complex.
(b) Successful parties may recover scale costs for work done by corporate (or ‘in-house’) lawyers employed by them, even though wages and overheads paid to them are much lower than the scale costs: CBA v Hattersley (2001) 15 NSWLR 333. It has even been suggested in obiter dicta in England that the Hattersley principle allows a corporation which engages external solicitors to claim on scale the costs of the internal solicitors instructing the external solicitors and/or doing work which the external solicitors would otherwise do.
(c) State entities may recover for the costs of lawyers employed by the State or State agencies on a similar basis. So, for example, the most recent Victorian Legal Services Commissioner regularly obtained costs orders against practitioners prosecuted for the work done instructing counsel by his employees and claimed that work at scale rates.
(d) There are exceptions made by legislation, including rules of court (see the first footnote in this post, above).
There are two critical characteristics of the principle which are often confused but which may be important in the context of this paper:
(a) The operation of the indemnity principle requires a comparison of the total fees and disbursements incurred and the amount claimed as between party and party; it is not open to a party to attack a lone item in a bill on the basis that the claim on scale for that work would give rise to remuneration greater than was actually paid by the successful party. So (I think, without being sure) it might not be appropriate to compare individually a successful party’s liability for counsel’s fees with the claim against the unsuccessful party for costs for work done by counsel. Rather, all the successful party’s liability for all its lawyers’ fees and disbursements is to be compared with the total party party costs claim.
(b) The successful party’s costs agreement might be void as a matter of law, for example because it was oral. Its lawyers’ costs disclosure defaults might entitle it to have the costs agreement set aside, or disregarded for the purposes of taxation. The client may not have to pay the costs until they have been taxed because of costs disclosure defaults by the solicitor. These circumstances would arise by operation of the Legal Profession Act 2004 or the more recent Legal Profession Uniform Law (Vic). The costs agreement might not cover some (or much) of the work in fact billed for at the rates specified in the costs agreement such that the lawyer might strictly speaking be entitled only to scale costs for the work done outside the costs agreement. In each case, the successful client might not have to pay the full amounts billed and might be entitled to a refund of monies already paid. But as a general proposition it is not open to the unsuccessful party to take advantage of these potential problems not in fact seized upon by the successful client so as effectively to argue that the unsuccessful party’s liability under a costs order should be capped at the amount which the successful party’s lawyer would be entitled to after a taxation in which the successful client took every point.
 Commonwealth Bank of Australia v Hattersley (2001) 51 NSWLR 333 at 340 , Dyktynski v BHP Titanium Minerals Pty Ltd  60 NSWLR 203 at 220 , Wentworth v Rogers (2006) 66 NSWLR 474 at 486  and at 487 .
 Dyktynski v BHP Titanium Minerals Pty Ltd  60 NSWLR 203 at  – .
 Trevorrow v South Australia (No 7)  SASC 5 at  (Gray J); see also ACN 068 691 092 Pty Ltd v Plan 4 Insurance Services Pty Ltd  SASC 39 (Withers J) and Blackall v Trotter (No 1)  VR 939 (Full Court) at 941.
 Kuek v Devflan Pty Ltd  VSC 91 at  (reversed on appeal, but not on this point). The situation has been different in England: see Friston, Civil Costs Law and Practice (Jordans, 2010) at [11.8] et seq.
 Kuek v Devflan Pty Ltd  VSCA 25, as explained by Kyrou J in Kuek v Devflan Pty Ltd  VSC 571 at  et seq, especially at  – ; Catto v Hampton Australia Ltd (In Liq)  SASC 231, esp at  – , followed by Kyrou J in Kuek at ; Sunland Waterfront (BVI) Ltd v Prudentia Investments Pty Ltd (No 4)  VSC 669 at  (Wood AsJ); Royal v El Ali (No 3)  FCA 1573. See also Maisano v Bodycorp Repairers Pty Ltd  VSC 52.
- Costs recovery in pro bono cases in Victorian state courts: Part 2
- What does ‘pro bono’ mean? Are ‘semi-pro bono’ costs agreements legally efficacious?
- Switch from party-party to standard basis not retrospective per SCV
- Costs recovery in pro bono cases in Victorian state courts: Part 3
- Winner gets indemnity costs but recovers less when loser proves winner’s costs agreement with his solicitors void